If you look at all of the U.S.-based operations of American International Group (AIG) -- the insurance and annuities company that our government has been compelled to take over and bail out with more than $100 billion of our money -- it's hard to see how the company got into trouble. Within the United States, AIG consisted largely of regulated insurance companies, subject to the conscientious oversight of 50 state insurance commissioners. How could such a company go wrong?
Actually, the better question is where did such a company go wrong? AIG was dragged down by its financial-products unit, which marketed the credit-default swaps on which the company could not make good when, unexpectedly, it had to pony up actual money to cover them. And that financial-products unit was headquartered not in the U.S. but in London -- the world financial center known for its aversion to regulatory controls. AIG, along with much of the American financial sector, had been favored -- and then, doomed -- by federal legislation that exempted credit-default swaps from all regulation. Still, at least on paper, there were two oversight bodies with responsibility over the activities of the London office. Because AIG owned a savings and loan association in the States, the U.S. Office of Thrift Supervision -- a notoriously lax regulator -- had oversight jurisdiction over the London office. So did the French government's banking regulator, since AIG owned a bank in France.
But the disintegration of AIG suggests that nobody really regulated its London-based financial-products unit. And the multinational mishmash of regulatory bodies that claimed jurisdiction over the London office while actually doing nothing to rein it in, not to mention the national regulatory bodies that didn't claim jurisdiction over the office (such as Britain's), suggests another culprit: the failure of nation-states to figure out who is responsible for overseeing the activities of banks and corporations whose offices are spread across the planet. To put it more succinctly, the failure of nation-states to figure out who the hell is supposed to regulate global capitalism.
Barack Obama may well seek a new New Deal to right a profoundly dysfunctional American economy. But he faces one constraint that Franklin Roosevelt didn't have to confront in the 1930s: The economy that Roosevelt saved was fundamentally a national economy that could be altered by national policies. The economy that Obama must fix, by contrast, has national dimensions that can be altered by national policies, but in matters ranging from corporate conduct to consumer safety to Americans' incomes, not to mention global warming, purely national solutions no longer suffice. To fix America today requires fixing global systems. The next New Deal won't work if it's only American.
The problem isn't confined to the financial sector, though the globalization of finance is vexing enough. Consider the issue of consumer safety, in pursuit of which the United States has created an array of agencies going back to the Food and Drug Administration (FDA) in 1906. About 60 percent of the fruits and vegetables that Americans consume are imported, and from 1997 to 2007, U.S. imports of agricultural and seafood products from China increased nearly four-fold. Virtually all the ascorbic acid that goes into vitamin C comes from China. Yet the FDA, which has jurisdiction over all these products, has no country- or factory-certification process through which it could prescreen these products, and its inspectors check less than 1 percent of imports when they arrive on our shores.
China is trying to beef up its own safety standards, but to date, its most publicized success is its execution of the head of a regulatory agency who was caught taking bribes. Even as China scurries to strengthen its safeguards -- indeed, because China will strengthen its safeguards -- production will drift to Vietnam and other nations where labor is cheaper and regulation more lax, says Rachel Weintraub, the director of product safety at the Consumer Federation of America. So how many inspectors should the FDA send to China -- or Vietnam? Should we also try to sign compacts that hold these countries to specific safety standards? Should there be a global product-safety treaty that penalizes nations for their violations? In short, who should regulate global consumer safety?
Or consider the issue of Americans' incomes, which have been largely stagnant in recent decades and which actually fell during the recovery that occurred in the middle years of the Bush presidency. Multiple factors are responsible for this anomaly, but surely the fact that U.S.?based corporations shifted their production and services to such cheaper-labor centers as East Asia, India, and Eastern Europe is one of them. Obama has singled out income stagnation as one of America's foremost problems, and some of the programs he supports -- rebuilding infrastructure, strengthening unions -- would address that concern.
But how much can American incomes rise if the downward pressure on wages created by a globalized labor market doesn't abate? According to the International Labor Organization's first-ever Global Wage Report, released this November, from 1995 to 2007 in nearly three-quarters of the world's nations, the share of gross domestic product that goes to wages has declined while the share going to profits has risen. Obama can certainly pursue policies that would create more well-paying jobs within the U.S., but American companies' reliance on low-wage labor outside our borders will limit such an effort. Can Obama secure a trade accord that sets decent labor standards and ensures workers' right to bargain? Can he -- can anyone -- get workers an across-the-board raise, when across-the-board means across borders, oceans, and hemispheres?
Some global problems actually can be fought at the national level -- provided that all the key nations join the fight. The current global recession could be countered at least in part if the governments of the world's major nations -- all of whose economies are tanking -- agreed to enact countercyclical recovery programs. Unfortunately, for every China, which is trying to stimulate its economy with massive public spending, there is a Germany, which seems unwilling to deficit-spend its way to recovery. One task that Obama will likely be compelled to undertake, then, is to persuade the Germanies and Japans -- nations historically opposed to Keynesian remedies -- to bolster their public outlays, lest their fiscal conservatism retard a global recovery.
This would be one of the easier challenges that globalization will pose to the new administration, since stimulus programs, which are enacted and administered on a national level, don't require establishing some new, transnational edifice. Other problems are knottier. Who, for instance, is responsible for riding herd on the next AIG? Is it possible to enact and enforce essentially uniform financial regulations globally, since just one nation with more lax regulations will likely attract lenders and investors to its shores and undermine the global regulatory system? "No center of hedge-fund activities wanted to regulate hedge funds unless the other centers did," says one securities analyst, which is why hedge funds have remained unregulated.
Many believe that Obama will have no alternative to regulating global finance within the existing structure of sovereign nation-states. Ethiopis Tafara, director of the Office of International Affairs of the Securities and Exchange Commission, believes that by using mutual access to markets as an incentive, the U.S. and other nations can agree on common, high-quality regulatory standards for securities trading. As for an international body that could exercise a regulatory role over major financial institutions, Tafara cannot conceive of one anytime soon. The two options for regulating a global financial institution, he says, are either for one national regulator to claim jurisdiction over all of a global company's activities, or, far more likely, for different nations' regulators to collaborate and share that responsibility -- each taking the lead in overseeing the firms' activities that are within its borders. Tafara affirms the G-20's call, at its November summit, for a college of supervisors, in which different nations' regulators would routinely share information and concerns about particular banks and companies.
But Tafara's model assumes that a range of national regulatory bodies could operate smoothly and in coordination with one another in dealing with a global firm. In such a system, however, some of the firm's activities could fall through the cracks -- particularly the activities the firm doesn't want regulated. A more proactive regulatory model is that put forth by economist/investor Rob Johnson, who was chief economist for the Senate Banking Committee in the 1970s and 1980s. Johnson believes that "an international order of homogeneous regulation" is a requirement for restoring order in capitalism. In a crisis such as this one, he argues, a Swiss bank can wreak havoc with finances in Los Angeles -- which is why he believes that sanctions rather than incentives must be the building blocks of the new system. Regulators have to tell companies and lenders, "You can't play in our markets if you don't report to us. You must file balance-sheet statements regularly. As your size increases, you must file more frequently."
But Johnson fears that in pursuing a global regulatory compact, Obama will encounter a distinctly national problem: the strength of Wall Street. "The financial sector in the U.S. and Britain is enormously powerful," Johnson says. Strict regulations may go down more easily in nations such as Germany that have stronger manufacturing sectors or labor movements.
The most far-reaching case for global regulation -- indeed, for a global New Deal -- comes from the global labor movement. That unions favor New Deal?like social and economic arrangements comes as no surprise; that the labor movement now has genuinely global institutions probably does. In recent years, hitherto national unions and union-federations have begun to go global simply to keep up with their employers. (Now, for instance, a global council comprises all the unions that have contracts with the world's largest steel manufacturer, ArcelorMittal, which meets with the company's top executives to hammer out cross-border labor standards.) On Nov. 15 -- the same day that the G-20 leaders met in Washington -- three such new global entities, the International Trade Union Confederation, the Trade Union Advisory Council to the Organization of Economic Cooperation and Development, and the Global Union Federations (sectoral organizations of individual unions), released their own "Washington Declaration." It called for nothing less than a new Bretton Woods system that would create a global economy with compacts and laws to regulate capitalism and foster countervailing institutions -- such as global unions themselves -- that would reduce the economic inequality inherent in unregulated capitalism.
The global unions' program goes well beyond anything to which Obama has committed himself, though its core goals -- regulating financial systems gone wild and raising workers' incomes -- are goals that Obama shares. Plainly, he can achieve many of his goals through domestic policy, but some of the choices he must make -- on trade in particular -- necessarily involve either accepting current global rules or writing and negotiating new ones.
Pushing for stronger global regulation of finance, product safety, labor rights, and the like might seem an indulgence Obama can ill afford. Or, given the exigencies of coping with a global economy, such global reach could prove surprisingly necessary.
As Obama begins to build the new New Deal, he needs to understand one of the revolutionary things about the original New Deal -- its nationalizing aspect. In this case, "nationalizing" doesn't mean the takeover of a private concern by the federal government. It means that, during the New Deal, government and unions ceased to be local and became national in scope -- for the simple reason that business and finance had long since become national in scope and, as such, had moved beyond the power of government and unions to regulate and bargain with them.
At the end of the Civil War, Americans lived within local economies. Then railroads, steel and oil companies, meatpackers, and eventually automakers, with the considerable assistance of the nation's largest banks, began functioning on a national level, bending state and local governments to their will. Largely unregulated and in the absence of national countervailing powers, these institutions were unassailable until the crash of 1929 and the ensuing depression stripped them of much of their clout. Only then did Franklin Roosevelt's New Deal create national regulations on their conduct, and the agencies to enforce them. Only then did genuinely national unions arise that won national contracts from employers.
Taking government from the state to the national level was necessary to save the economy and build American prosperity. During the waning days of the Hoover administration, for instance, the governors of a number of states ordered bank closings to forestall depositors' runs on the banks. What the governors could not do, however, was restore depositor confidence. That is precisely what Roosevelt did, by coupling an order to close all banks so their books could be checked with the establishment of a federal deposit insurance agency -- a solution beyond capabilities and resources of the nation's insolvent state houses. Similarly, though individual states had enacted wage and hour laws before the Depression, creating the prosperity and stability of the post?World War II economy required the New Deal federal standards.
Today, Obama faces a similar challenge to Roosevelt's -- and has a similar opportunity. Over the past several decades, the same asymmetry of power that characterized America between 1865 and 1932 reappeared -- but on a larger scale. Finance and corporations have become global, outstripping the regulatory and bargaining powers of merely national governments and unions. Now, as in 1933, it is suddenly possible to globalize at least some standards and regulations, just as Roosevelt once nationalized them. The changes will come more haltingly and piecemeal than they did in Roosevelt's New Deal, because the leap from nation-state to global order is far greater than that from state capitols to Pennsylvania Avenue. But as in Roosevelt's time, the changes will come because the asymmetry of power led to an unregulated economy that collapsed of its own weight and folly -- and because the only way out of the collapse may be to regulate that power on the global scale where, until recently, it was unchallenged.
How broad the changes are, how sturdy or rickety the new global architecture that emerges is, depends on a multitude of variables. Financial institutions may well oppose the formation of transnational agencies that, say, restrict the amount of leverage they're allowed to carry; multinational corporations will surely resist anything resembling global labor laws. Nations that disproportionately rely on the financial sector will oppose financial restrictions; nations at different stages of economic development will take different positions on wage and environmental standards. The very idea of a global New Deal would be altogether preposterous but for the fact that the return of prosperity may depend upon it. But then, the same once could have been said of a national New Deal, too. Finally, just as the creation of the national New Deal depended upon Roosevelt, the creation of a global one will depend upon Obama -- a figure who seems uniquely suited to voice not just the nation's but the planet's aspirations. The world -- its citizens and its economy -- awaits him.
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